Ethereum is outperforming bitcoin. Morgan Stanley thinks it knows why

Published Wed, Jun 16 20218:25 PM EDT

Cryptocurrency ethereum has outperformed bitcoin so far this year, and Morgan Stanley has given a number of reasons why. The "alternative" crypto coin is up around 240% this year, while the world's best-known cryptocurrency is up less than 38%. It's been a volatile few months in the crypto world , with bitcoin's value peaking in April at around $65,000 before falling back to around $30,000 , while ether peaked in May at around $4,000 and is now trading around $2,500. Ether is viewed as an alternative to bitcoin. Fans like it for a number of reasons including the fact it underpins many other cryptocurrencies , but it's yet to be adopted by private institutions in the way that bitcoin has been. It's important to note that ether's market cap is less than half that of bitcoin's, but trading volumes for the smaller coin surged to $600 billion in May — 60% higher than bitcoin volumes, according to Morgan Stanley. There are some key reasons for the outperformance of ether, according to the investment bank, which updated its views on crypto in a note last week. Energy usage One key factor to consider when looking at why ether is currently outperforming bitcoin is energy usage. "ETH is considered more 'green' than bitcoin," Morgan Stanley strategist Sheena Shah and equity analysts James Faucette and Betsy Graseck wrote in the note. Crypto miners use purpose-built computers to solve complex mathematical equations that effectively enable a coin transaction to go through. The miners are rewarded for their efforts in whatever the coin is that they're mining. However, the entire process, known as proof of work, is energy intensive because of the amount of power used by the computers. To slash ether's electricity usage, the Ethereum Foundation is transitioning its process for approving transactions to proof of stake instead of proof of work. In theory, this means all someone will need to become a validator on the network is proof that they hold some ether, or a "stake." Ultimately, it should remove the need for vast amounts of computing power needed to validate transactions and the Ethereum Foundation claims it will use more than 99.9% less energy than before. "Increasing worries about bitcoin's energy usage made ether relatively more attractive as PoW doesn't use as much energy to run, at the expense of the security of the transaction," the Morgan Stanley experts wrote. It's worth noting there are other coins that already run on proof of stake networks, such as Cardano and Algorand. Coins could be destroyed Ether also has a new "money supply plan" coming in July that will change the way miners are paid, and make ether scarcer. "An upgrade to the protocol is expected (called EIP-1559) where the fees that miners are currently paid (in ETH) will be 'burned' instead of being given to miners," wrote the Morgan Stanley analysts. "ETH money supply will be destroyed, increasing its scarcity." Decentralized finance Other cryptocurrencies beyond ether also rely on ethereum's blockchain, which is a growing list of records, called blocks, that are linked together using cryptography. Indeed, the vast majority of so-called decentralized finance still runs on the ethereum blockchain, the Morgan Stanley analysts noted. But new competitors are launching, and ethereum is no longer the go-to blockchain for cryptocurrency creators. "Most new coins opted to use an existing blockchain, which until a year ago was mostly ethereum," said the analysts. "Ethereum transaction fees were rising quickly this year as more and more digital assets used the blockchain, hitting the limits of the way ethereum is currently set up to handle transactions," they added. Binance, the world's largest cryptocurrency exchange, built the Binance Smart Chain and made it relatively easy for creators of existing ethereum-based coins to port their coin to the BSC. Bitcoin's carbon footprint Bitcoin has come under significant pressure in recent months amid a growing awareness of its energy usable. It has a carbon footprint comparable to that of New Zealand, producing 36.95 megatons of CO2 annually, according to Digiconomist. This is a major cause for concern in countries around the world which are currently trying to cut their carbon emissions and mitigate climate change. Tesla CEO Elon Musk said last month that his electric car company will stop accepting bitcoin as a form of payment because of environmental concerns, causing the price of bitcoin to drop 5% in a matter of minutes. Although, he said this week Tesla will start accepting bitcoin again as long as miners use more clean energy. Meanwhile China, which has some of the cheapest electricity in the world, is imposing strict new regulations on bitcoin mining. When the Chinese Communist Party said it would " crack down on bitcoin mining and trading behavior " in May the price of bitcoin fell 25% in a few days. "China's crackdown seems tied to China's newly stated efforts to reduce carbon emissions, with approximately two-thirds to three-quarters of bitcoin mining thought to be done in China, a substantial portion of which uses electricity from coal powered plants," the analysts wrote. They noted that bitcoin miners in the country are now in the process of moving elsewhere (to use other energy sources) or cashing out, which has not helped prices.

Bitcoin and ether are the two most prominent cryptocurrencies.

Jaap Arriens | NurPhoto | Getty Images

Cryptocurrency ethereum has outperformed bitcoin so far this year, and Morgan Stanley has given a number of reasons why.

The "alternative" crypto coin is up around 240% this year, while the world's best-known cryptocurrency is up less than 38%.

It's been a volatile few months in the crypto world, with bitcoin's value peaking in April at around $65,000 before falling back to around $30,000, while ether peaked in May at around $4,000 and is now trading around $2,500.

Ether is viewed as an alternative to bitcoin. Fans like it for a number of reasons including the fact it underpins many other cryptocurrencies, but it's yet to be adopted by private institutions in the way that bitcoin has been.

It's important to note that ether's market cap is less than half that of bitcoin's, but trading volumes for the smaller coin surged to $600 billion in May — 60% higher than bitcoin volumes, according to Morgan Stanley.

There are some key reasons for the outperformance of ether, according to the investment bank, which updated its views on crypto in a note last week.